Informed Trading in Business Groups, Ownership Concentration, and Market Liquidity

Business groups, which are collections of publicly traded companies with significant amount of common ownership, dominate private sector activity in developing countries. This paper studies how information flows within these groups by analyzing the trading behavior of pension fund managers in firms that belong to the same group. The paper shows that while pension fund managers are momentum traders on non-affiliated companies, they trade in anticipation of future abnormal returns in affiliated firms. Ownership concentration and business group ties exacerbate information asymmetries, discouraging investment and depressing stock market participation. Using the merger and acquisition activity among pension fund managers as a natural experiment, the paper provides evidence that increases in stock ownership concentration, via the threat of informed trading, adversely affect liquidity. The results indicate that cross-ownership structures and extensive investor-industry relations might curb the expected benefits from the presence of institutional investors, limiting market development.

Bibliographic Details

Main Authors:	Leano, Miguel, Pedraza, Alvaro
Format:	Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2016-05
Subjects:	MICROSTRUCTURE, OUTSIDE INVESTORS, ACCOUNTING, FUND MANAGER, INTERNATIONAL CAPITAL, STOCK, FOREIGN INVESTORS, FUTURES, FUND MANAGERS, INTEREST, SECURITY MARKETS, INSTITUTIONAL INVESTORS, DUMMY VARIABLES, INFORMATION FLOWS, PENSION SYSTEMS, EXCHANGE, PORTFOLIO CHOICE, STOCK MARKET, LIQUIDITY, EQUITY MARKET, DEVELOPING COUNTRIES, POLITICAL ECONOMY, EQUITY SECURITIES, PORTFOLIO, ASSET MANAGEMENT, STOCK MARKET CAPITALIZATION, PENSION SYSTEM, DUMMY VARIABLE, MONEY MANAGERS, INTERNATIONAL BANK, PENSION, INFORMATION ASYMMETRIES, DEVELOPING COUNTRY, REGULATORY AUTHORITIES, INSURANCE COMPANY, INFORMATION DISCLOSURE, MARKET PARTICIPANTS, MARKET LIQUIDITY, INSTITUTIONAL INVESTOR, MARKET DEEPENING, SAVINGS, STOCK TRADING, ILLIQUIDITY, INVESTMENT BEHAVIOR, MARKET DEVELOPMENT, PENSION FUND INVESTMENT, TELECOMMUNICATIONS, OWNERSHIP STRUCTURES, COMMERCIAL BANK, FINANCIAL STUDIES, DOMESTIC INSTITUTIONAL INVESTORS, PORTFOLIOS, TRADING, GLOBALIZATION, DEBT, MARKETS, RETURN, PRIVATE SECTOR DEVELOPMENT, SECONDARY MARKET LIQUIDITY, TYPE OF INVESTORS, ASSET CLASSES, PENSION FUNDS, FINANCE, TRANSACTIONS, AUCTIONS, EMERGING MARKETS, INTERNATIONAL STANDARDS, EQUITY, TRANSACTION, INVESTORS, REGULATORY FRAMEWORKS, GOOD, OWNERSHIP STRUCTURE, OWNERSHIP DATA, INTERNATIONAL PORTFOLIOS, MARKET CAPITALIZATION, MARKET FAILURES, TURNOVER, FUTURE, TRADING ACTIVITY, SECONDARY MARKETS, RETURNS, MARKET INDEX, INVESTMENT BANK, CAPITALIZATION, GOVERNANCE PRACTICES, SHARES, BALANCE SHEET, TRANSACTION COSTS, MARKET, MARKET VALUE, INSIDER TRADING, INDIVIDUAL SECURITIES, SECURITIES, INTERNATIONAL PORTFOLIO, GOVERNANCE, SHAREHOLDERS, HOLDINGS, INSURANCE, GOVERNMENT DEBT, TRADE, BUYBACKS, INVESTOR, SECURITY, EQUITY MARKETS, STOCKS, STOCK EXCHANGE, INVESTMENT, DOMESTIC EQUITY, COMMERCIAL BANKS, INVESTMENT PORTFOLIO, SHARE, BALANCE SHEETS, PORTFOLIO HOLDINGS, TRANSACTIONS COSTS, TRADES, MARKET MICROSTRUCTURE, BID, INVESTMENTS, CHECK, SHAREHOLDER, PENSION FUND, STOCK RETURNS, MATURITIES, INSTRUMENT, INFORMED INVESTORS, SECONDARY MARKET, LIABILITIES, DOMESTIC INVESTORS, ASSET MANAGERS, CORPORATE GOVERNANCE, INVESTMENT DECISION,
Online Access:	http://documents.worldbank.org/curated/en/2016/05/26419593/informed-trading-business-groups-ownership-concentration-market-liquidity https://hdl.handle.net/10986/24525
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